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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
Commission File Number 0-27393
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CUMBERLAND BANCORP, INCORPORATED
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(Exact Name of Registrant As Specified in Its Charter)
Tennessee 62-1297760
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(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
4 Corporate Centre
810 Crescent Centre Dr, Suite 320 Franklin, Tennessee 37067
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(Address of Principal Executive Offices and Zip Code)
(615) 383-6619
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(Registrant's Telephone Number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
Common stock outstanding: 15,405,526 shares at April 30, 2003.
1
CUMBERLAND BANCORP, INCORPORATED
TABLE OF CONTENTS
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2003 (unaudited) 3
and December 31, 2002.
Consolidated Statements of Operations- For the three months 4
ended March 31, 2003 and 2002 (unaudited).
Consolidated Statements of Changes in Shareholders' Equity - For the 5
three months ended March 31, 2003 and 2002 (unaudited).
Consolidated Statements of Cash Flows - For the three months 6
ended March 31, 2003 and 2002 (unaudited).
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 14
Item 4. Controls and Procedures 15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities. 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
Item 5. Other Information. 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures and Certifications 17
2
ITEM 1. FINANCIAL STATEMENTS
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands, except share and per share amounts)
March 31, December 31,
(Dollars in thousands, except share amounts) 2003 2002
------------ ------------
Assets:
Cash and due from banks $ 26,010 $ 21,681
Federal funds sold 10,847 27,561
------------ ------------
Cash and cash equivalents 36,857 49,242
Interest-bearing deposits in financial institutions 3,223 9,466
Securities available for sale, at fair value 95,360 79,051
Securities held to maturity, fair value $41,190 at March 31, 2003
and $11,616 at December 31, 2002 39,811 11,488
Loans 546,736 526,215
Allowance for loan losses (8,505) (9,062)
------------ ------------
Loans, net 538,231 517,153
Premises and equipment 23,393 23,366
Accrued interest receivable 3,828 3,922
Restricted equity securities 5,115 5,040
Investment in unconsolidated affiliates 6,616 6,163
Other real estate 5,164 6,338
Loan servicing rights 187 213
Other intangible assets 1,597 1,597
Other assets 7,550 6,674
------------ ------------
Total assets $ 766,932 $ 719,713
============ ============
Liabilities and Shareholders' Equity:
Deposits
Noninterest-bearing $ 65,825 $ 56,639
Interest-bearing 574,867 536,359
------------ ------------
Total deposits 640,692 592,998
Notes payable 5,450 5,500
Federal funds purchased and securities sold under repurchase agreements 5,083 7,336
Advances from Federal Home Loan Bank 51,852 50,852
Accrued interest payable 3,195 3,129
Other liabilities 3,457 2,425
Trust preferred securities 12,000 12,000
------------ ------------
Total liabilities 721,729 674,240
------------ ------------
Shareholders' equity:
Common stock, $0.50 par value, authorized 20,000,000 shares;
shares issued - 15,396,426 in 2003 and 15,382,626 in 2002 7,698 7,691
Additional paid-in capital 27,538 27,504
Retained earnings 9,922 9,749
Accumulated other comprehensive income (loss) 45 529
------------ ------------
Total shareholders' equity 45,203 45,473
------------ ------------
Total liabilities and shareholders'
equity $ 766,932 $ 719,713
============ ============
See accompanying notes to consolidated financial statements (unaudited).
3
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except share and per share amounts)
THREE MONTHS ENDED
MARCH 31,
(Dollars in thousands except per share data) 2003 2002
-------------- --------------
Interest income:
Loans, including fees $ 9,030 $ 10,184
Securities 1,187 744
Deposits in financial institutions 24 22
Federal funds sold 36 149
Restricted equity securities dividends 55 57
-------------- --------------
Total interest income 10,332 11,156
Interest expense:
Time deposits of $100,000 or more 1,096 1,145
Other deposits 2,151 2,849
Federal funds purchased 21 33
Notes payable, advances from Federal Home Loan Bank, and trust
preferred securities 878 961
-------------- --------------
Total interest expense 4,146 4,988
Net interest income 6,186 6,168
Provision for loan losses 424 892
-------------- --------------
Net interest income after provision
for loan losses 5,762 5,276
Other income:
Service charges on deposit accounts 914 856
Other service charges, commissions and fees 426 316
Mortgage banking activities 306 353
Gain on sale of SBA loans 0 37
-------------- --------------
Total other income 1,646 1,562
Other expenses:
Salaries and employee benefits 3,550 3,077
Occupancy 876 875
Other operating 2,342 2,105
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Total other expenses 6,768 6,057
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Income before income taxes 640 781
Income tax expense 238 274
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Net earnings $ 402 $ 507
============== ==============
Net earnings per share - basic $ 0.03 $ 0.04
Net earnings per share - diluted 0.03 0.04
Weighted average shares outstanding - basic 15,383,945 13,812,966
Weighted average shares outstanding - diluted 15,610,675 13,962,373
See accompanying notes to consolidated financial statements (unaudited).
4
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2003 and 2002
(UNAUDITED)
(Dollars in thousands, except share and per share amounts)
Accumulated
Common Stock Additional Other Total
-------------------------- Paid-in Retained Comprehensive Shareholders'
(Dollars in thousands) Shares Amount Capital Earnings Income (Loss) Equity
----------- ----------- ----------- ----------- ------------- ------------
Balance, December 31, 2001 13,808,236 $ 6,904 $ 22,289 $ 10,061 $ 59 $ 39,313
Exercise of stock options 23,100 12 51 -- -- 63
Dividends $0.015 per share -- -- -- (207) -- (207)
Comprehensive Income:
Net earnings -- -- -- 507 -- --
Other Comprehensive Income
Change in unrealized loss on
securities available for sale net of
$152 in income taxes -- -- -- -- (249) --
Total Comprehensive Income 258
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2002 13,831,336 $ 6,916 $ 22,340 $ 10,361 $ (190) $ 39,427
=========== =========== =========== =========== =========== ===========
Balance, December 31, 2002 15,382,626 $ 7,691 $ 27,504 $ 9,749 $ 529 $ 45,473
Exercise of stock options 13,800 7 34 -- -- 41
Dividends $0.015 per share -- -- -- (229) -- (229)
Comprehensive Income:
Net earnings -- -- -- 402 -- 402
Other Comprehensive Income
Change in unrealized gain (loss) on
securities available for sale, net of
$299 in income taxes -- -- -- -- (463) (463)
Less: adjustment for realized gains
included in net income, net of $13
$13 in income taxes -- -- -- -- (21) (21)
-----------
Total Comprehensive Income (82)
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 31, 2003 15,396,426 $ 7,698 $ 27,538 $ 9,922 $ 45 $ 45,203
=========== =========== =========== =========== =========== ===========
See accompanying notes to consolidated financial statements (unaudited).
5
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands, except share and per share amounts)
THREE MONTHS ENDED
MARCH 31,
(Dollars in thousands) 2003 2002
------------ ------------
Cash flows from operating activities:
Net income $ 402 $ 507
Adjustments to reconcile net income to cash from operating activities:
Provision for loan losses 424 892
Depreciation and amortization 420 450
Operations of unconsolidated affiliates 54 59
Origination of mortgage loans held for sale (17,653) (13,571)
Proceeds from sale of mortgage loans held for sale 17,546 14,457
Net gain on securities transactions (21) (328)
Net (gain) loss on sale of other real estate (45) --
Net change in:
Accrued interest receivable 94 334
Accrued interest payable and other liabilities 1,098 269
Other, net (925) (1,070)
------------ ------------
Total adjustments 992 1,492
------------ ------------
Net cash provided by operating activities 1,394 1,999
------------ ------------
Cash flows from investing activities:
Net change in interest-bearing deposits in financial institutions 6,243 (2,086)
Purchases of securities available for sale (26,083) (4,033)
Proceeds from maturities, redemptions, and sales of securities
available for sale 9,311 10,406
Purchases of securities held to maturity (31,510) (481)
Proceeds from maturities redemptions, and sales of securities
held to maturity 3,187 146
Net change in loans (21,395) 3,256
Investment in unconsolidated affiliates (507) (147)
Purchases of premises and equipment (447) (157)
Proceeds from sale of other real estate 1,219 1,986
------------ ------------
Net cash used by investing activities (59,982) 8,890
------------ ------------
Cash flows from financing activities:
Net change in deposits 47,694 20,913
Decrease in federal funds purchased (4,097) (315)
Proceeds from securities sold under agreements for repurchase 1,844 --
Advances from Federal Home Loan Bank 1,000 --
Repayments to Federal Home Loan Bank -- --
Repayments of notes payable (50) (1,458)
Dividends paid (229) (207)
Purchase and retirement of common stock -- --
Proceeds from issuance of common stock 41 63
------------ ------------
Net cash provided by financing activities 46,203 18,996
------------ ------------
Net decrease in cash (12,385) 29,885
Cash and due from banks at beginning of period 49,242 40,399
------------ ------------
Cash and due from banks at end of period $ 36,857 $ 70,284
============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 4,080 $ 5,454
Income taxes paid -- --
Non-Cash Activities:
Assets acquired through foreclosure 2,348 2,068
See accompanying notes to consolidated financial statements (unaudited).
6
CUMBERLAND BANCORP, INCORPORATED AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements as of March 31, 2003 and for
the three-month periods ended March 31, 2003 and 2002 were prepared on the same
basis as the audited financial statements and, in the opinion of management,
include all adjustments, consisting of normal recurring adjustments, to present
fairly the information. They do not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Operating results for the three-month period ending March 31, 2003
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2003. For further information, refer to the 2002
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K.
On January 1, 2003, the Company adopted SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure". This statement amends
SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative
methods for voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. As the Company continues to account for stock-based employee
compensation under APB 25, the adoption of this statement did not have a
material impact on the financial statements or results of operations.
7
CUMBERLAND BANCORP, INCORPORATED
FORM 10-Q, CONTINUED
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this discussion is to provide insight into the financial
condition and results of operations of the Company and its subsidiaries. This
discussion should be read in conjunction with the consolidated financial
statements. Reference should also be made to the Company's Annual Report on
Form 10-K, for a more complete discussion of factors that impact liquidity,
capital and the results of operations, as well as discussion of the Company's
critical accounting policies.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements regarding, among
other things, the anticipated financial and operating results of the Company.
Investors are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release any modifications or revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions investors that future
financial and operating results may differ materially from those projected in
forward-looking statements made by, or on behalf of, the Company. Such
forward-looking statements involve known and unknown risks and uncertainties,
including, but not limited to, (i) increased competition with other financial
institutions; (ii) lack of sustained growth in the economy in the Company's
market area; (iii) rapid fluctuations in interest rates; (iv) significant
downturns in the businesses of one or more large customers; (v) risks inherent
in originating loans, including prepayment risks; (vi) the fluctuations in
collateral values, the rate of loan charge-offs and the level for the provision
for loan losses; (vii) changes in the legislative and regulatory environment;
and (viii) loss of key personnel. These risks and uncertainties may cause the
actual results or performance of the Company to be materially different from
any future results or performance expressed or implied by such forward-looking
statements. The Company's future operating results depend on a number of
factors which were derived utilizing numerous assumptions and other important
factors that could cause actual results to differ materially from those
projected in forward-looking statements.
OVERVIEW
Cumberland Bancorp continued to experience growth throughout the first quarter
of 2003 primarily as a result of leveraging the $5.4 million in capital raised
in early December 2002 and an increase in loan receivables. This growth was
partially funded by a corresponding increase in deposits. Identification,
monitoring, and remediation of problem assets and improvement of loan
underwriting continue to require management attention and adversely impact
operating results.
The Company maintained its net interest income at levels comparable to the
quarter ended March 31, 2002, despite operating in the sustained and historical
low-rate environment. However, the level of non-performing assets continues to
reduce interest income generation and the ongoing identification by management
of additional problem loans will likely result in the Company incuring
additional loan charge-offs and making increased provisions for loan losses
which will negatively impact future earnings. Interest expense associated with
the Company's high level of time deposits benefits from the current interest
rate environment.
8
Operating expenses increased compared to the same period last year as the
Company's efforts to centralize certain operational functions begin. These
efforts are a work in process with results that may not be realized until later
in the year.
RESULTS OF OPERATIONS
Cumberland Bancorp's results of operations depend primarily upon the level of
net interest income, provision for loan losses, non-interest income and its
non-interest expenses. For the three months ended March 31, 2003, net earnings
totaled $402,000 as compared to $507,000 for the first three months of 2002, a
decline of 20.71%. Although the provision for loan losses declined from
$892,000 for the three-month period ending March 31, 2002 to $ 424,000 for the
same period in 2003, the decline was offset by the increase in noninterest
expense of over $700,000, much of which is associated with the Company's
efforts to centralize operations and revise its management organization
structure as discussed below.
NET INTEREST INCOME
Net interest income represents the amount by which interest earned on various
earning assets exceeds interest paid on deposits and other interest-bearing
liabilities and is the most significant component of the Company's earnings.
The Company's total interest income decreased $824,000 or 7.39% during the
three months ended March 31, 2003 as compared to the same period in 2002. The
decrease in total interest income was primarily attributable to the ongoing
repricing of assets to significantly lower market interest rates. Also
restricting interest income is the level of nonperforming assets, which has
decreased slightly since December 31, 2002 from $25.0 million to $23.5 million
but is above the $22.8 million level at March 31, 2002. Had such loans been
performing in the three-month period ended March 31, 2003, interest income
would have increased by $341,000. Interest income from the securities portfolio
increased 59.54% for the three months ended March 31, 2003 compared to the same
period in 2002, resulting from growth in the Company's securities portfolio as
a result of the leverage transaction discussed later in this document.
Interest expense also decreased $842,000 or 16.88% for the three months ended
March 31, 2003 as compared to the same time period in 2002. Interest expense
benefited from the current low rate environment as the Company's certificates
of deposit base was renewed at significantly lower costs. Renewals of time
deposits, as well as new deposit growth, are bearing considerably lower
interest rates than those paid in the first quarter of 2002. Management also
aggressively controlled the interest rates paid on its transaction accounts as
it saw balances in interest-bearing deposits increase $38.5 million or 7.18%
since year-end.
The foregoing resulted in a slight increase in net interest income, before the
provision for loan losses, for the three months ended March 31, 2003 as
compared to the same time period for in 2002. The Company's interest rate risk
modeling reflects an asset sensitive bias and therefore net interest income is
positioned to benefit from an increase in interest rates.
PROVISION FOR POSSIBLE LOAN LOSSES
The provision for loan losses was $424,000 and $892,000 for the first three
months of 2003 and 2002, respectively. The Company believes implementation of a
new corporate wide eight-point risk rating system has provided a useful
9
tool in evaluating credits. Deteriorating economic conditions have placed
stress on some of our commercial and consumer borrowers causing weaknesses and
inability to pay their loan obligations. Our west Tennessee banks, in
particular, have experienced a higher than normal amount of bankruptcies which
account for a large portion of loan charge-offs which are discussed below. The
provision for loan losses is the amount required as a charge to earnings to
increase the allowance for loan losses to an appropriate level, based on past
loan experience, and other factors, which in management's judgment deserve
current consideration in estimating possible loan losses. Such factors include
past loan experience, growth and composition of the loan portfolio, internal
review of specific problem loans, the results of recent regulatory
examinations, the relationship of the allowance for loan losses to outstanding
loans, and current economic conditions that may affect the borrower's ability
to repay. Management has in place a system designed to monitor its loan
portfolio in an effort to identify potential problem loans and additional
provisions will likely be appropriate as a result of ongoing efforts to better
identify problem loans.
NONINTEREST INCOME
The components of the Company's noninterest income include service charges on
deposit accounts, other fees and commissions, mortgage banking activities and
gain on sale assets. Total noninterest income for the three months ended March
31, 2003 increased by 5.38% to $1.65 million from $1.56 million for the same
period in 2002. The overall increase was due primarily to increased revenue
generated on deposit accounts. Service charges on deposit accounts increased
$58,000 or 6.78% to $914,000 during the three months ended March 31, 2003
compared to $856,000 for the same period in 2002. Other service charges, fees
and commissions totaled $426,000 and $316,000 for the three months ended March
31, 2003 and 2002, respectively, an increase of $110,000 or 34.81%. Management
has placed an emphasis on the fee collection for services provided. Revenue
from mortgage banking activities decreased $47,000 or 13.31% to $306,000 as
compared to $353,000 for the first quarter of 2002, primarily due to
stabilization of mortgage rates over the past year and current military
operations overseas. No gains on sales of SBA loans were recognized for the
first quarter of 2003 compared to $37,000 in the same period in 2002.
NONINTEREST EXPENSE
Noninterest expense consists primarily of salaries and employee benefits,
occupancy expenses, furniture and equipment expenses, data processing expenses
and other operating expenses, including minority interest in net earnings of
unconsolidated affiliates. Total noninterest expense increased $711,000 or
11.74% during the first quarter of 2003 compared to the same period in 2002.
This increase is primarily attributable to expenses associated with the
increase in personnel as the company begins its centralization of certain
backroom operations. Management believes significant cost savings will be
gained through these efficiencies. A holding company structure has been defined
and expanded to provide support to the affiliated banks and is expected to
reduce the level of duplicate operational processes. The Company is currently
evaluating the affect that this will have on both number of employees and
employee-related expenses. The Company believes that realization of cost
savings from these efficiencies will be dependent upon effective implementation
and may not be recognized until later fiscal quarters.
FINANCIAL CONDITION
BALANCE SHEET SUMMARY
The Company's assets totaled $766.9 million at March 31, 2003, an increase from
December 31, 2002 of 6.56% or
10
$47.2 million. The increase in total assets was funded primarily from the 8.04%
increase in deposits of $47.7 million since year-end. Loans, net of allowance
for loan losses, totaled $538.2 million at March 31, 2003, and increase of $21.1
million or 4.08% over year-end 2002 balances. This increase in deposits coupled
with loan growth and centralized management of the Company's securities
portfolio have decreased the Company's Federal funds sold balances to $10.8
million from $27.6 million at December 31, 2002. The Company's consolidated
securities portfolio has grown 49.30% or $44.6 million since year-end. This
growth is a result of the $47.1 million leveraged transaction that was completed
in January 2003 in which $3.7 million in state, county and municipal securities
and $38.0 million in mortgage-backed securities were purchased through the use
of funds generated from $24.0 million in brokered CDs, $6.9 million in
government entity time deposits, $1.0 million in FHLB advances, $3.5 million in
capital, $4.8 million in Fed Funds Purchased and $1.5 million in demand
deposits.
Total liabilities increased by 7.04% to $721.7 million at March 31, 2003
compared to $674.2 million at December 31, 2002. This increase was composed
primarily of a $47.7 million or 8.04% increase in total deposits. Total
outstanding debt decreased $1.3 million to $62.4 million as of March 31, 2003.
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures". These pronouncements apply to impaired loans
except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment including credit card, residential
mortgage, and consumer installment loans.
A loan is impaired when it is probable that the Company will be unable to
collect the scheduled payments of principal and interest due under the
contractual terms of the loan agreement. Impaired loans are measured at the
present value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price, or the fair value of the
collateral if the loan is collateral dependent. If the measure of the impaired
loan is less than the recorded investment in the loan, the Company shall
recognize an impairment by creating a valuation allowance with a corresponding
charge to the provision for loan losses or by adjusting an existing valuation
allowance for the impaired loan with a corresponding charge or credit to the
provision for loan losses.
The Company's first mortgage single family residential and consumer loans are
divided into various groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment and thus are not subject to the
provisions of SFAS Nos. 114 and 118. Substantially all other loans of the
Company are evaluated for impairment under the provisions of SFAS Nos. 114 and
118.
The Company considers all loans subject to the provisions of SFAS 114 and 118
that are on nonaccrual status to be impaired. Loans are placed on nonaccrual
status when doubt as to timely collection of principal or interest exists, or
when principal or interest is past due 90 days or more unless such loans are
well-secured and in the process of collection. Delays or shortfalls in loan
payments are evaluated with various other factors to determine if a loan is
impaired. The decision to place a loan on nonaccrual status is also based on an
evaluation of the borrower's financial condition, collateral, liquidation
value, and other factors that affect the borrower's ability to pay.
Generally, at the time a loan is placed on nonaccrual status, all interest
accrued on the loan in the current fiscal year is reversed from income, and all
interest accrued and uncollected from the prior year is charged off against the
allowance for loan losses. Thereafter, interest on nonaccrual loans is
recognized as interest income only to the extent that cash is received and
future collection of principal is not in doubt. If the collectibility of
outstanding principal is doubtful, such interest received is applied as a
reduction of principal. A nonaccrual loan may be restored to accruing status
when principal and interest are no longer past due and unpaid and future
collection of principal and interest on a timely basis is not in doubt.
11
Other loans may be classified as impaired when the current net worth and
financial capacity of the borrower or of the collateral pledged, if any, is
viewed as inadequate. In those cases, such loans have a well-defined weakness
or weaknesses that jeopardize the liquidation of the debt, and if such
deficiencies are not corrected, there is a probability that the Company will
sustain some loss. In such cases, interest income continues to accrue as long
as the loan does not meet the Company's criteria for nonaccrual status.
The Company's charge-off policy for impaired loans is similar to its charge-off
policy for all loans in that loans are charged-off in the month when they are
considered uncollectible.
Net charge-offs totaled $ 981,000 for the first quarter with provision expense
equaling $424,000. The allowance for loan losses was $8.5 million or 1.56% of
total loans at March 31, 2003 compared to $9.1 million or 1.71% of total loans
at December 31, 2002. Total non-performing loans decreased to $23.5 million at
March 31, 2003 compared to $24.8 million at year-end, a decline of $1.3 million
or 5.24%. Other real estate was $5.2 million at March 31, 2003, down from the
$6.3 million at December 31, 2002. Management believes the balance of the
allowance for loan losses to be adequate as of March 31, 2003 based on its
internal evaluation of the allowance for loan losses and loan portfolio.
Ongoing review of the Company's loan portfolio assists management in
identifying potential problem credits and determining the level of the
allowance for loan losses. Quarterly, the allowance for loan losses is
evaluated under the provision of SFAS 114 and 118 as discussed above. Under
these provisions, specific provisions are made for loans considered impaired. A
general reserve is also maintained for the Company's small-balance homogenous
loans.
The level of the allowance and the amount of the provision involve evaluation
of uncertainties and matters of judgment. Although management believes the
allowance for loan losses at March 31, 2003 to be adequate, further
deterioration in problem credits, the results of ongoing internal evaluation
and review of the loan portfolio, or the impact of deteriorating economic
conditions on other businesses, could require increases in the provision for
loan losses and could result in future charges to earnings which could have a
significant negative impact on net earnings. Furthermore, management believes
that continued deterioration in the economy in both the Company's primary
market area and nationally could have a significant impact on loans not
currently identified as problems as well as those that are identified.
LIQUIDITY AND ASSET MANAGEMENT
The Company's management seeks to maximize net interest income by managing the
Company's assets and liabilities within appropriate constraints on capital,
liquidity and interest rate risk. Liquidity is the ability to maintain
sufficient cash levels necessary to fund operations, meet the requirements of
depositors and borrowers and fund attractive investment opportunities. Higher
levels of liquidity bear corresponding costs, measured in terms of lower yields
on short-term, more liquid assets and higher interest expense involved in
extending liability maturities. Liquid assets including cash, due from banks
and Federal funds sold totaled $36.9 million. Additionally, the Company has
$95.4 million in securities classified as available-for-sale that could be sold
for liquidity needs.
The Company's primary source of liquidity is a stable core deposit base. In
addition, loan payments provide regular cash flow. Borrowing lines with
correspondent banks, the Federal Home Loan Bank and Federal Reserve augment
these traditional sources.
Interest rate risk (sensitivity) focuses on the earnings risk associated with
changing interest rates. Management seeks to maintain profitability in both
immediate and long-term earnings through funds management/interest rate risk
12
management. The Company's rate sensitivity position has an important impact on
earnings. Senior management meets monthly to analyze the rate sensitivity
position of the subsidiary banks. These meetings focus on the spread between
the banks' cost of funds and interest yields generated primarily through loans
and investments.
The Company's securities portfolio consists of earning assets that provide
interest income. For those securities classified as held-to-maturity the
Company has the ability and intent to hold these securities to maturity or on a
long-term basis. Securities classified as available-for-sale include securities
intended to be used as part of the Company's asset/liability strategy and/or
securities that may be sold in response to changes in interest rate, prepayment
risk, the need or desire to increase capital and similar economic factors.
Securities totaling approximately $9.7 million mature or will be subject to
rate adjustments within the next twelve months.
A secondary source of liquidity is the Company's loan portfolio. At March 31,
2003, loans of approximately $292.7 million either will become due or will be
subject to rate adjustments within twelve months from the respective date.
Continued emphasis will be placed on structuring amortizing adjustable rate
loans.
Approximately $258.3 million in certificates of deposits will become due during
the next twelve months. Historically, there has been no significant reduction
in immediately withdrawable accounts such as negotiable order of withdrawal
accounts, money market demand accounts, demand deposit and regular savings.
Management anticipates that there will be no significant withdrawals from these
accounts in the future. However, future decreases in rates could have a
negative effect on total deposits.
The Company's bank borrowings and trust preferred securities have certain
interest payment requirements and the Company has certain operating expenses at
the holding company level, which require dividends or management fees from the
Company's bank subsidiaries in order to be funded. As discussed above, the
Company's recent asset quality problems have resulted in regulatory
restrictions (approval) on its subsidiaries' ability to declare dividends to
the holding company, which could require the holding company to raise
additional capital in order to make such payments. The Company anticipates that
it will be able to meet required payments on its outstanding debt and trust
preferred securities for the next four quarters through available cash
resources and such additional capital. However, the Company's regulators have
considerable discretion in determining whether to grant required approvals, and
no assurance can be given that such approvals will be forthcoming.
CAPITAL POSITION AND DIVIDENDS
At March 31, 2003, total shareholders' equity was $45.2 million or 5.89% of
total assets. The decrease in shareholders' equity during the three months
ended March 31, 2003 results from a decline in other comprehensive income and
the declaration of cash dividends during the first quarter 2003, offset by the
Company's net income and exercise of stock options.
The Company's principal regulators have established minimum risk-based capital
requirements and leverage capital requirements for the Company and its
subsidiary banks. These guidelines classify capital into two categories of Tier
I and total risk-based capital. Total risk-based capital consists of Tier I (or
core) capital (essentially common equity less intangible assets) and Tier II
capital (essentially qualifying long-term debt, of which the Company and
subsidiary banks have none, and a part of the allowance for possible loan
losses). In determining risk-based capital requirements, assets are assigned
risk-weights of 0% to 100%, depending on regulatory assigned levels of credit
risk associated with such assets. The risk-based capital guidelines require the
subsidiary banks and the Company to have a total risk-based capital ratio of
8.0% and a Tier I risk-based capital ratio of 4.0%. Trust preferred securities
are allowed to be counted in Tier I capital, subject to certain limitations. At
March 31, 2003, the Company's total risk-based
13
based capital ratio was 11.16% and its Tier I risk-based capital ratio was
approximately 9.98% compared to ratios of 12.18% and 10.92%, respectively at
December 31, 2002. The required Tier I leverage capital ratio (Tier I capital
to average assets for the most recent quarter) for the Company is 4.0%. At
March 31, 2003, the Company had a leverage ratio of 7.59%, compared to 7.95% at
December 31, 2002.
The Company and its subsidiaries, Cumberland Bank, BankTennessee and Bank of
Dyer, have informally agreed with or committed to bank regulatory officials to
take various actions, including to reduce the level of criticized or
non-performing loans, to improve loan underwriting, problem loan resolution and
collection, and strategic and capital planning, to obtain prior regulatory
approval before incurring additional holding company indebtedness, repurchasing
shares, or paying dividends from certain subsidiary banks to the holding company
or from the holding company to shareholders, and to maintain certain capital
levels at subsidiary banks in excess of those required for well capitalized
status. The most restrictive of these provisions would require the Company to
maintain a Tier I leverage ratio of at least 7.0% at BankTennessee, Bank of Dyer
and Cumberland Bank. The Company and its subsidiaries believe they were in
compliance in all material respects with these informal understandings at March
31, 2003. The Company and its subsidiaries intend to continue to comply with
these informal understandings, and the Company has received the required
approval to pay the dividends previously paid by it subsequent to entering into
the informal agreements and commitments discussed above. The Company believes
that the proceeds of its private placement, earnings from operations and
available funds will be sufficient to allow the Company to meet all these
commitments and the requirements for well-capitalized status through the end of
2003. However, the Company's regulators have considerable discretion in
determining whether to grant required approvals, and no assurance can be given
that such approvals will be forthcoming.
IMPACT OF INFLATION
Although interest rates are significantly affected by inflation, the inflation
rate is immaterial when reviewing the Company's results of operations.
EFFECT OF NEW ACCOUNTING STANDARDS
A new accounting standard dealing with asset retirement obligations was adopted
during 2003. The Company's management does not believe this standard has a
material affect on its financial position of results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary component of market risk is interest rate volatility.
Fluctuations in interest rates will ultimately impact both the level of income
and expense recorded on a large portion of the Company's assets and
liabilities, and the market value of all interest-earning assets and
interest-bearing liabilities, other than those which possess a short term to
maturity. Based upon the nature of the Company's operations, the Company does
not maintain any foreign currency exchange or commodity price risk.
Interest rate risk (sensitivity) management focuses on the earnings risk
associated with changing interest rates. Management seeks to maintain
profitability in both immediate and long-term earnings through funds
management/interest rate risk management. The Company's rate sensitivity
position has an important impact on earnings. Senior management of the
subsidiary banks meet monthly to analyze the rate sensitivity position. These
meetings focus on the spread between the cost of funds and interest yields
generated primarily through loans and investments.
14
Net interest income should benefit from an increase in market interest rates.
This position reflects the asset sensitive bias of the balance sheet. Net
interest income is exposed to falling interest rates. Market indicators suggest
significant further declines in short-term interest rate are unlikely in the
near future.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures, as defined in Rule
13a-14 promulgated under the Securities Exchange Act of 1934 (the "Exchange
Act"), that are designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms and that such
information is accumulated and communicated to its management, including its
principal executive officer and its principal financial officer, as
appropriate, to allow timely decisions regarding required disclosure. Within
the 90 days prior to the date of this report, the Company carried out an
evaluation, under the supervision and with the participation of its management,
including its principal executive officer and its principal financial officer,
of the effectiveness of the design and operation of its disclosure controls and
procedures. Based on the evaluation of these disclosure controls and
procedures, the principal executive officer and principal financial officer
concluded that the Company's disclosure controls and procedures were effective.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect the internal controls subsequent
to the date of such evaluation.
15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification of the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certification of the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended March 31, 2003.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUMBERLAND BANCORP, INCORPORATED
(Registrant)
DATE: 5/15/03 /s/ RICHARD HERRINGTON
--------------------- -----------------------------------------
Richard Herrington, President and
Chief Executive Officer
DATE: 5/15/03 /s/ ANDY LOCASCIO
--------------------- -----------------------------------------
Andy LoCascio, Chief Financial Officer
(Principal Accounting and Financial
Officer)
17
CERTIFICATIONS
I, Richard Herrington, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cumberland
Bancorp, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
By /s/ Richard Herrington
--------------------------------------
Name: Richard Herrington
President and Chief Executive Officer
18
I, Andy LoCascio, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Cumberland
Bancorp, Incorporated;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
By: /s/ Andy LoCascio
------------------------
Name: Andy LoCascio
Chief Financial Officer
19